Kurdistan’s sales agreement with Baghdad bodes well for Genel Energy in 2015

This year could mark a turning ­­­­­­­point in the fortunes of the Kurdistan oil industry in general and Genel Energy in particular. The share price of the £1.65billion London-listed mid- cap group which often operates more like a major, was in the doldrums for the second half of last year and the beginning of this , closing on Friday at 669above its low of 608p but way below the 52 week high of 1097p achieved earlier in 2014.

It would be easy to blame the military successes of Isis or the sharp decline in the oil price since June 2014 or the indifferent success of the exploration drilling campaign in Malta, Morocco and Angola.The bombing campaign against Isis by the US, aided by the UK, seems to have arrested further advances in Kurdish Region of Iraq (KRI) and calmed geo-political fears for the time being.

The collapse of the oil price is a worry for all oil companies, but Genel, with life of field F & D costs less than US$ 3 a barrel and opex — that is to say lifting costs — on the two main fields in KRI, Taq Taq (44 per cent interest) and Tawke (25 per cent interest) less than US$2 a barrel, Genel is truly a low costs producer and not overwhelmingly concerned about low oil prices. The exploration, appraisal and development programme in the Kurdistan region is broadly funded from operating cash flow.

As for the drilling campaign away from the KRI, yes, it was expensive but at the end of 2014 Genel’s cash balances stood at circa US$490 million following the successful Senior Unsecured Bond issue last May.

The real reason for the company’s sluggish share price performance lies in Kurdistan itself. A series of substantial discoveries in the latter part of the last decade meant the investment risks weren’t (for the most part) technical or geological. For several years the big, unanswered questions were about exports and payments. Could Kurdistan develop and control its own infrastructure? Were the exports, unauthorised by Baghdad legal? Who would buy the oil? And critically would the oil companiesget paid for it?

Genel’s turnover in 2014 is estimated to run out at the lower end of the forecast US$500 million to US$600 million according to the company’s most recent update. But a lot of this came from local sales and the lack of transparency in payments here caused some concern.

This all started to change from last December when Baghdad, perhaps fearful it could not live with US$65 a barrel oil let alone US$49 a barrel oil, finalised a one year deal with the KRG after years of dispute over oil sales. In December Genel received a payment for US$24 million for sales. This was from sent through the pipeline to Ceyhan on Turkey’s Mediterranean coast. From now on Genel will be able to transport its oil each day and get paid for it by Baghdad’s marketing organisation, Somo.

The pipeline to Ceyhan which exits the KRG at Fishkharbour, currently has a capacity to transport over 500,000 barrels of oil a day. This is expected to rise to 700,000 barrels a day. Genel is one of the largest foreign producers in the KRI. The current guidance is that net working interest production for 2014 averaged 69,000 boepd an increase of 58 per cent over 2013. The company’s 2015 production guidance is maintained at 90-100,000 boepd.

Revenue guidance for 2015 has been revised from US$500 million to US$600 million at a Brent crude price of US$80 a barrel to US$350 million to US$400 million at a Brent crude price of US$50 a barrel. However, capital expenditure has been slashed and given the company’s low costs Genel now has a comfortably profitable, substantial oil business on its hands in the KRI.

Going forward Genel will certainly play a key role in a transformational KRI gas business. The region has 11 tcf mean gas resources and 80 million mean liquid resources. The gas is concentrated in two fields Miran (Genel 75 per cent, KRG 25 per cent interest) and Bina Bawi (Genel 44 per cent, OMV, operator, 36 per cent, KRG 20 per cent). Genel is to acquire OMV’s 36 per cent interest in Bina Bawi for US$20 million upfront and US$130 million staged after first gas. This will make Genel, the sole contractor for both fields.

There is a material and growing domestic market opportunity in the shape of 105 billion cubic feet per annum to 175 bcf per annum of near term domestic market demand from power plants and industrial users.

But the real prize is Turkey which is extremely gas hungry. A contract has already been signed between KRG and Turkey for the export, through low cost infrastructure and at good prices, of 140 bcf a year of gas from 2018 rising to 350 bcf in 2020 and an option of increasing to 700 bcf thereafter. That is a lot of gas. The gas is for later, however. The oil is for now.